NEW YORK (CNNfn) - Norwest Corp. said Monday it will merge with Wells Fargo & Co. in a stock deal valued at $34 billion, a transaction that ends Wells Fargo's tenure as one of the industry's last major independent firms and transforms Norwest into one of the nation's leading regional banks.
Billed as a merger of equals, the deal will create the nation's sixth largest bank with assets of $191 billion and operations in 21 states throughout the West and Midwest.
The pairing of San Francisco-based Wells Fargo with Minneapolis-based Norwest is the latest in a buyout whirlwind in the financial sector that peaked in April but hasn't yet subsided.
Paul Hazen, chairman and chief executive officer of Wells Fargo, will be the combined bank's chairman. Richard Kovacevich, the top executive at Norwest, will be president and CEO at the new bank.
News of the deal drew a muted response on Wall Street. Norwest shares (NOB) closed down 2-5/8 at 37-1/16. Wells Fargo (WFC) gained 2 at 365-1/4 following a sharp climb Friday.
Some analysts say Norwest shareholders reacted negatively to the news because Kovacevich has earned a reputation for perfecting the concept of neighborhood banking. A merger with big-league Wells Fargo, it is believed, could threaten the balance Norwest has achieved, they said.
Kovacevich, however, said he has gone on the record in recent years saying he was not against doing a "big deal that made sense to shareholders.
"I am very confident that shareholders will see wisdom in this when they see more and learn more," he said.
The merger with Wells Fargo, a well-established player in metropolitan banking, made more sense for Norwest than spending the money to study new markets and develop expansion strategies on its own, he said.
Hazen confirmed Monday that Kovacevich approached him in May to discuss a possible merger.
Most recent speculation had been that Wells Fargo, the last large bank franchise in the hot California market, was plotting a deal with U.S. Bancorp, also of Minneapolis.
"We had looked for Wells to enter into a merger but we didn't know Norwest would be the other partner," said analyst Tom Theurkauf of Keefe, Bruyette & Woods.
"We had expected, at least most of us anyway, that US [Bancorp] was the more likely candidate to merge with Northwest," Theurkauf added.
Together, Norwest and Wells Fargo have about 90,000 workers. They said they will each freeze new hiring as the merger is carried out.
Executives from both companies said it is still too soon to say how many positions will be eliminated, but they noted that employees at the office headquarters of each will be most affected.
Still, Kovacevich said layoffs should be minimal, especially for workers who remain "flexible" to new job opportunities within the combined company. (243K WAV or 243K AIF)
In the deal, Wells Fargo shareholders will receive 10 shares of Norwest for each Wells Fargo share they own.
The two sides said they expect the merger to add to cash earnings per share in the first year of combined operations, excluding transaction costs of about $950 million.
Cost savings of about $650 million are expected by the third year of combined operations.
The two companies will have equal representation on the new company's board.
"This merger of equals will bring together two high performing companies with complementary businesses, products, technology, markets and customers," Kovacevich said.
He said the new bank will have the most branches of any bank in the country.
Norwest stock has been among the nation's high-fliers among banks in the past few years. Wells Fargo shares have also performed well, but the bank's earnings haven't kept pace with the industry since 1996 when it began slashing jobs after it led an abortive effort to buy First Interstate Bancorp for $13.5 billion.
Hazen, however, said Wells Fargo is once again on the move.
"Management estimates we are back on the path of a very attractive growth rate relative to the banking [industry] and our past two years," he said.
The merger, set to be completed in the second half of 1998, is expected to be accounted for as a pooling of interests and be tax-free to shareholders. Both company boards have approved the deal.
Don Smith, head of mergers and acquisitions at Houlihan, Lokey, Howard & Zukin, said a merger was "forced" on Wells Fargo because the company hasn't fared well recently.
"The very good management at Norwest will help this situation," Smith said, adding that the buyout frenzy in banking is a natural outcome. "We have thousands and thousands of banks. We have to consolidate."
Wells Fargo will maintain its century-old name, its shareholders will own 52.5 percent of the new bank, and its headquarters will stay in San Francisco as part of the deal.
The two banks said that together they will rank as the national leader in Internet banking and agricultural lending.